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Tuesday June 3, 2008 - 21:17:59 GMT
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FX Research - Morning Report

Morning Report Wednesday 4 June 2008

News and views
New Zealand dollar was largely at the whim of the USD during the overnight session. Early on markets sold the USD on a continuation of the late Monday story that the S&P had downgraded financial stocks (both equity and USD negative). Against that backdrop the NZD grinded higher in early European dealings from opening levels around USD0.7840 to highs just shy if USD0.7900. But, US Federal Reserve Chairman Bernanke provided the decisive turning point for the day, sending the USD surging across the board after he signalled strong support for the USD. In a very rare move Chairman Bernanke said the Fed is “attentive” to the inflationary consequences of a softer USD. Bernanke also noted that the Fed, “in collaboration with our colleagues at the Treasury...continue to carefully monitor developments in foreign exchange markets”. These are the strongest comments on the USD any US officials let alone the Fed have delivered in a very long time and are likely to underpin the USD for a while yet. The NZD was trading at in around NZD0.7860/80 just ahead Chairman Bernanke’s speech but slid to lows just above USD0.7800 before stabilising. The currency continued to outperform other major currencies overnight, even as US equities starting falling sharply in afternoon trade.

The Australian dollar was also at the whim of the USD sliding about 80pips in the wake of Bernanke’s comments, but it continues to run into good support just ahead of USD0.9600.

USD/JPY jumped 100pts on Bernanke’s speech today, revisiting its recent highs above JPY105.50.

The euro tumbled close to US2 cents on Bernanke’s speech from highs near USD1.5600 to lows just above USD1.5400. EUR recouped a fraction of its losses in afternoon NY trading amid a sharp sell off in US equities linked to renewed concerns about the health of US investment bank Lehman Brothers.

Fed chair Bernanke on inflation risk. In remarks on the economic outlook, the Fed chairman warned that “the possibility that commodity prices will continue torise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self confirming.” He also drew attention “to the implications of changes in the value of the dollar for inflation and inflation expectations” and committed to “continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.” This emphasis on inflation risks, including rare (for a Fed chairman) discussion of the US dollar in that context, makes it very clear that the Fed won’t be cutting rates again any time soon, and raises the risk that the FOMC might adopt some sort of formal policy bias in its next statement on June 25 reflecting those concerns.

US factory orders up 1.1% in April. The non-durables component was boosted by chemicals and energy prices. Factory stocks were flat, a weak start to the quarter for inventories. In other news, GM announced the closure of four plants and was reviewing the future of the Hummer.

Euroland GDP growth revised up from 0.7% to 0.8% in Q1. An even more solid start to the year, although the 0.2% contribution from household consumption was weaker than expected. We expect Q2 growth to be significantly weaker. Also, Euroland producer prices accelerated to 6.1% yr in April.

UK construction PMI falls from 43.1 to 43.9 in May. More evidence of recession in the UK housing market.

USD influences aside, the NZD will be dominated by the RBNZ announcement on Thursday. On that, our economists view the risks as being skewed towards a more hawkish tone, which would likely see the NZD higher, at least on the day. While NZD/USD continues to be frustrated into USD0.7900 the currency nonetheless continues to outperform EUR and JPY. Wednesday 4 June 2008

Michael Gordon, Market Strategist, Wellington, Ph: (04) 470 8266
With contributions from Westpac Economics and Westpac Strategy

Events Today
Country Release Last Forecast

NZ May ANZ Commodity Price Index –0.3% –
Aus Q1 GDP 0.6% 0.3%
RBA Asst Gov Lowe Speaking (11:30AEST)
US May Corporate Layoff Announcements
May ADP Employment Survey ch’ 10k –30k
Q1 Non–Farm Productivity (Revised) 2.2% 2.6%
Q1 Unit Labour Costs 2.2% 1.9%
May ISM (Non Manufacturing) 52.0 49.0
Jpn Q1 MoF Capex Survey %yr –7.7% –9.9%
Eur May PMI Services (F) 50.6 a 50.6
Apr Retail Sales –0.4% –0.4%

UK May PMI Services 50.4 50.5
May BRC Shop Price Index %yr 1.2%

Latest Research Papers/Publications
• NZ Weekly Forex Outlook (3 June)
• RBNZ MPS Preview (29 May)
• NZ Weekly Forex Outlook (26 May)
• NZ Budget 2008 Review (22 May)

These papers/publications are available on Online Research on Westpac
Institutional Bank’s website (

Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 14 November 2007. All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.



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